Genutec Business Solutions v. Taus
Filed 1/30/14 Genutec
Business Solutions v. Taus CA4/3
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prohibits courts and parties from citing or relying on opinions not certified
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IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH
APPELLATE DISTRICT
DIVISION
THREE
GENUTEC BUSINESS SOLUTIONS, INC.,
Plaintiff, Cross-defendant, and Appellant,
v.
MICHAEL
TAUS et al.,
Defendants,
Cross-complainants, and Appellants;
EISNER, KAHAN & GORRY,
Objector and Appellant;
LAW OFFICES OF M. CANDICE BRYNER et al.
Objectors and Respondents.
G046062
(Super. Ct. No. 07CC07918)
O P I N I O N
Appeal
from orders of the Superior Court of
Orange County, Jamoa A. Moberly, Judge.
Affirmed.
Shulman
Hodges & Bastian, Gary A. Pemberton and Kiara W. Gebhart for Plaintiff,
Cross-defendant and Appellant, and Objector and Respondent Shulman Hodges &
Bastian.
Law
Offices of Jimmy C. Taus and Jimmy C. Taus for Defendant,
Cross-complainant, and Appellant Michael Taus.
Jones
Day, Paul F. Rafferty, Eric M. Kennedy and Rhianna S. Hughes for Defendant,
Cross-complainant, and Appellant Lawnae Hunter.
Eisner,
Kahan & Gorry; Eisner, Kahan, Gorry, Chapman, Ross & Jaffe, Timothy J.
Gorry and Erica E. Hayward; Fink & Steinberg, Keith A. Fink and Keven
Steinberg for Objector and Appellant.
M.
Candice Bryner, in pro. per., Law Offices of M. Candice Bryner and Jong Lee for
Objectors and Respondents Law Offices of M. Candice Bryner and M. Candice
Bryner.
* *
*
This
appeal concerns two motions for sanctions
made under Code of Civil Procedure section 128.7.
Solutions’ (Genutec’s) breach of fiduciary duty claims against its former attorneys,
accountants, and board of directors, including Michael Taus and Lawnae
Hunter. Believing there was no basis for
a lawsuit against them, Taus and Hunter filed a section 128.7 motion for
sanctions (hereafter referred to in this
sanctions motion). They sought
$1,098,046.03 against Genutec and its counsel, namely, (1) the Law Offices of
Candice Bryner (the Bryner Firm), and (2) Shulman, Hodges & Bastian (the
Shulman Firm). In response, Genutec filed
a counter motion for sanctions permitted by
section 128.7, subdivision (h), on the grounds the Taus/Hunter
sanctions motion was filed primarily for an improper purpose (hereafter the
counter motion). The counter motion
sought $51,990 against Taus, Hunter, and their counsel, Eisner, Kahan &
Gorry (the Eisner Firm).
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The
court denied the Taus/Hunter motion for sanctions. It awarded the Bryner Firm $45,000 for
successfully oppose this motion. The
court granted the counter motion,
awarding Genutec sanctions of $50,467.50.
On
appeal, Taus, Hunter, and the Eisner Firm make the following arguments: (1) the court should have granted their motion
for sanctions; and (2) it was an abuse of discretion to award sanctions to the
Lee Firm, the Bryner Firm, and the
Shulman Firm because they were all self-represented litigants. Genutec filed a cross-appeal, arguing the trial
court erred in denying its request for attorney fees incurred in defending the Taus/Hunter
sanctions motion. Finding no error, we
affirm the trial court’s orders.
I
FACTS
AND PROCEDURAL BACKGROUND
Earlier
this year, we considered Genutec’s appeal from a judgment of dismissal entered after
the trial court granted a summary judgment motion in favor of Genutec’s former
attorney Stephen A. Weiss, a partner at Gersten Savage LLP (referred to
collectively and in the singular as Weiss).
We affirmed the trial court’s determination the one-year statute of
limitations set forth in section 340.6, subdivision (a), barred Genutec’s
complaint alleging a single cause of action for professional negligence against
Weiss. (Genutec Business Solutions, Inc., v. Stephen A. Weiss (July 9, 2013, G044744) [nonpub. opn.] (Genutec
I).)
The procedural
background of the underlying lawsuit is described in greater detail in our
by reference. (Genutec I, supra, G044744.)
Suffice it to say, Genutec filed a lawsuit against anyone remotely
involved in its $14 million acquisition of Smart Development Corporation
(hereafter SD), which caused the company to suffer substantial financial
losses.
Genutec
provides emergency notification services and voice broadcasting services for
businesses, charities, and other entities.
Genutec generates the requested telephone calls for its customers by
using sophisticated computer equipment and software. Genutec purchased SD based on representations
about its lucrative customer contacts and its automatic dialing software that
could potentially increase Genutec’s dialing capacity and efficiency.
Genutec
obtained financing for the acquisition through two hedge fund lenders (the
Lenders). The SD acquisition required a
substantial amount of due diligence investigation, and documentation. As discussed in Genutec I, Weiss was hired to represent Genutec in the merger and
acquisition of SD.
Soon
after the acquisition, Genutec learned there were serious problems integrating
SD’s software into Genutec’s dialing system.
Genutec determined SD’s software was using unlicensed and pirated
software as a part of its dialing platform. Genutec’s customers began to
complain of system crashes and refused to pay their bills.
In
April 2006, Genutec’s largest customer ceased doing business with it. In early July 2006, two board members contacted
several shareholders and warned Genutec would be insolvent by the end of 2006,
and the company’s managers appeared incapable of addressing the crisis. The shareholders and members of the board
held a telephone conference and together agreed there should be an investigation. The parties dispute whether the board
thoroughly investigated the shareholders’ concerns. At the end of
July 2006, the board informed the shareholders the investigation was
complete and the mismanagement concerns were unfounded. However, the board members alerted the
shareholders to the possibility of fraud or misrepresentations made in
connection with the SD acquisition.
Genutec
retained the Bryner Firm and David E. Outwater from the law firm Outwater &
Pinckes to investigate the wrongdoings relating to damages arising from SD’s
acquisition. On December 8, 2006, these firms filed a lawsuit on Genutec’s behalf against SD and its
owner, Johan Hendrik Smit Duyzentkunst (referred to as “Smit†by the parties,
and thus to avoid confusion and for consistency, we will adopt the same
abbreviation, with no disrespect intended).
The complaint alleged causes of action for fraud, breach of contract,
and rescission. In 2009, the case was
ordered to arbitration, and our record does not disclose the outcome of those
proceedings.
after Genutec defaulted on its loans, Genutec and the Lenders entered into a
restructuring agreement authorizing the Lenders to become the primary shareholders
of the company. Genutec’s chief
executive officer (CEO),
Lee Danna, and the entire board of directors were forced to resign
as a condition of the agreement.
On July 10, 2007, Genutec (now controlled by the Lenders) filed a complaint against
Danna and the other officers and directors for breach of fiduciary duty, breach
of contract, and breach of the implied covenant of good faith and fair
dealing. The defendants named in the lawsuit
were Genutec’s former directors: Danna,
Taus, Hunter, Edith Martin, Paul Abramowitz, Joseph LaTorre, Leonard
Makowka, Farzad Hoorizadeh and Smit (who became a director of Genutec after the
SD acquisition).
In
November 2007, Taus and Hunter filed a cross-complaint against Genutec alleging
breach of contract and seeking equitable indemnification. They alleged they were “outside directors†on
Genutec’s board and in connection with their service they had executed written
indemnification agreements with Genutec.
Taus and Hunter explained Genutec’s lawsuit alleged they breached their
fiduciary duty by failing to
(1) make reasonable inquiries regarding the SD acquisition, or (2)
properly oversee and monitor Genutec’s management’s activities. They demanded indemnification and Genutec
refused.
Amended Complaint
On February 26, 2008, Genutec filed a first amended complaint raising a new claim for
legal malpractice against Weiss. The
complaint also set forth a cause of action against Genutec’s accountants (Lewak
Greenbaum & Goldstein). In response
to various demurrers, Genutec filed a second amended and then a third amended complaint
(TAC). Taus, Hunter, and Weiss filed
motions for summary judgment based on allegations raised in the TAC.
On April 2, 2010, before the hearings on the summary judgment motions, and
approximately five months before the scheduled trial date, the court granted
Genutec’s motion to file a fourth amended complaint (FAC) based on the discovery
of additional facts regarding Smit and Weiss.
Denied
court denied Taus and Hunter’s two summary judgment motions. The first motion sought summary judgment or
adjudication of the
cross-complaint against Genutec.
The court determined the motion was moot as to the equitable
indemnification action because that cause of action was dismissed in
January 2008. As for the
breach of contract claim, the court determined Taus and Hunter failed to
present sufficient evidence of their damages.
The
second motion sought summary judgment or adjudication of Genutec’s TAC’s first
and third causes of action (both alleging breach of fiduciary duty). The court determined the primary basis for the
motion was Taus and Hunter’s theory the business judgment rule protected them from
any liability. The court observed Taus
and Hunter asserted they acted in good faith and appropriately relied on the
information provided by other officers, they reviewed and relied on reports and
information from experts, and they responsibly discharged their duties as
outside directors. However, the court determined
Taus and Hunter failed “to present sufficient evidence to support this
challenge and to meet their initial burden.â€
Specifically, the court concluded their declarations to be “vague and
conclusory†and Danna’s deposition testimony “insufficient to establish that Taus
and Hunter did anything.†The court
noted it “needed testimony from Taus and Hunter, either in the form of
deposition testimony or adequate declarations, to establish what they actually
did to discharge their duties and be entitled to protection of the business
judgment rule.â€
As
mentioned earlier in this opinion, in Genutec
I, this court affirmed the court’s September 2010 judgment dismissing Weiss
from the lawsuit. (Genutec I, supra, G044744.) We
concluded Weiss satisfied his burden of showing Genutec knew or should have
discovered the alleged professional negligence as early as November 2005, but
no later than December
8, 2006, triggering the one-year statute of
limitations. (Ibid.) Consequently, Genutec’s
February 2008 malpractice action against Weiss was properly dismissed as
untimely. (Ibid.)
On
April 28, 2011, several months after the court dismissed Weiss from the action,
Taus and Hunter filed a motion for section 128.7 sanctions against Genutec, the
Shulman Firm, and the Bryner Firm, requesting $1,098,046.03 (hereafter referred
to as the Taus/Hunter sanctions motion).
In addition to monetary sanctions, they sought dismissal of all claims raised
against them. They maintained the FAC
lacked evidentiary support, was frivolous in nature, and was “filed with the
improper purpose of harassing Taus and Hunter[.]†They alleged the following: “[Genutec] sued virtually everyone associated
with the company, without apparent regard to facts or common sense. Former outside directors . . . [Taus and
Hunter] found themselves squarely within the purview of Genutec’s scattershot
approach to the litigation. Hiding
behind vague allegations and offering no real evidence, . . . Genutec managed
to string the litigation against Taus and Hunter along for more than three
years. Genutec was only able to
accomplish this feat by deliberately withholding from document production
documents that unequivocally demonstrate . . . allegations against Taus and
Hunter were pure fiction.†Taus and
Hunter requested the court sanction Genutec and its attorneys for their misconduct.
month, Genutec sought section 128.7 sanctions ($51,990) against Taus, Hunter, and
their counsel, the Eisner Firm. It alleged
the Taus/Hunter sanctions motion was filed for an improper purpose, to harass
and delay litigation in violation of section 128.7, subdivision (h). Genutec asserted Taus, Hunter, and
the Eisner Firm knew their motion was frivolous because “Genutec’s
claims had already withstood attack on summary judgment and that Genutec’s
alleged discovery misconduct [was] not the proper basis for a motion under [s]ection
128.7.â€
In
support of its motion, Genutec included declarations from the following
attorneys: (1) Skaist (its corporate
counsel); (2) Outwater (hired as litigation counsel in the 2006 fraud lawsuit
against Smit); (3) Bryner (also hired as litigation counsel in the 2006 fraud
lawsuit and hired to defend Genutec against the Taus and Hunter’s
cross-complaint); (4) Gary Pemberton (a partner at the Shulman Firm);
and
(5) Kiara Gebhart (an associate at the Shulman Firm). In addition, Genutec submitted a declaration
by James McCarthy, a computer forensic analyst hired by the Shulman Firm.
In
response, Taus and Hunter filed a request for judicial notice of one document (Genutec’s
opposition to their motion for summary judgment of the
cross-complaint). They also
made evidentiary objections to the declarations submitted by Genutec.
Genutec
filed a response to these objections, arguing the statements were admissible
and not hearsay. In addition, Genutec
filed a reply noting Taus, Hunter, and the Eisner Firm had failed to file any
opposition to the counter motion. It
argued the counter motion should be granted because it was unopposed.
Taus/Hunter Sanctions Motion
Bryner Firm opposed the Taus/Hunter sanctions motion arguing there was no basis
for sanctions. The Bryner Firm was
represented by
the Law Offices of Jong H. Lee (the Lee Firm). The Bryner Firm presented evidence Genutec retained
Bryner in October 2006, to file the fraud lawsuit against Smit (and the action was being arbitrated). Genutec also hired the Bryner Firm to defend
it against Taus and Hunter’s cross-complaint.
The Bryner Firm alleged it had no authority to withdraw Genutec’s
complaint because Bryner was not hired to represent Genutec in its plaintiff
capacity.
In
addition, the Bryner Firm argued the Taus/Hunter sanctions motion failed to
comply with the 21-day safe harbor provision.
And finally, the Bryner Firm argued there was no evidence showing
Genutec’s complaint lacked evidentiary support or that the Bryner Firm acted in
bad faith warranting section 128.7 sanctions.
The Bryner Firm stated that given the serious nature of the
Taus/Hunter sanctions motion seeking over $1 million, it retained attorney Jong
Lee to prepare the opposition. The
Bryner Firm requested $91,595 in attorney fees incurred in defending the
sanctions motion. The Bryner Firm’s
opposition was supported by Bryner’s declaration.
the Taus/Hunter Sanctions Motion and Evidentiary Objections
2011, Genutec and the Shulman Firm filed an opposition, raising the same
arguments contained in the counter motion.
They asserted evidence supported the complaint, allegations of discovery
misconduct were not a basis for a section 128.7 motion, and the motion failed
to assert any specific misconduct regarding the Shulman Firm. Like the Bryner Firm, Genutec noted the Taus/Hunter
sanctions motion was prematurely filed, failing to comply with the 21-day safe
harbor provision. Genutec requested
$28,325 in attorney fees, incurred in defending the sanctions motion.
In
addition, Genutec filed evidentiary objections to Timothy J. Gorry’s
declaration, filed in support of the Taus/Hunter sanctions motion. Gorry is a partner at the Eisner Firm. Genutec asserted the statements contained in
the declaration lacked foundation, personal knowledge, and were not relevant.
Firm
the Eisner Firm asserted Genutec mischaracterized their motion as nothing more
than a discovery dispute or way to force a settlement. They alleged this was untrue. They complained the FAC lacked evidentiary
support and Genutec should have dismissed them long ago from the lawsuit. They pointed to the following evidentiary
support: (1) “Deposition testimony of
Taus and Hunter . . . demonstrates [they], as members of the [a]udit
[c]ommittee, did undertake an
investigation of the shareholder concerns[;]†(2) there is evidence Taus and
Hunter took steps they considered necessary to remedy the issues; and (3) Smit
and Danna concealed information about the SD dialing platform from the board
members. They concluded this “exculpatory
evidence†warranted their dismissal from the case.
In a
separately filed reply, Taus, Hunter, and the Eisner Firm addressed the Bryner
Firm’s opposition to the sanctions motion.
They argued the Bryner Firm’s “‘not me’ stance with respect to its
responsibility for the allegations made by Genutec†was misplaced. They explained, “The Bryner Firm has
consistently made the same allegations against Taus and Hunter
that Genutec’s co-counsel, [the Shulman Firm] has made, and has adopted those
allegations in its pleadings against Taus and Hunter.â€
The
Bryner Firm responded to this reply by filing evidentiary objections to Gorry’s
declaration and by filing supplemental declarations by Lee, Bryner, and her counsel
Tumy Nguyen. The Bryner Firm filed a
supplemental brief in support of its request for attorney fees. It increased the amount of requested fees to
$95,375.
Genutec
and the Shulman Firm filed a supplemental brief in support of its request for
attorney fees for successfully opposing the Taus/Hunter sanctions motion. Genutec filed a second supplemental brief in
support of its section 128.7 counter motion, increasing the amount of requested
fees to $63,950.
At the
hearing on June
17, 2011, Gorry admitted to the court the
Taus/Hunter sanctions motion was untimely filed because it was “three days off
on the safe harbor period†under section 128.7.
In addition, Gorry apologized to the court and counsel for not sending
out the prepared opposition to Genutec’s counter motion. He claimed to have “no idea why it didn’t get
filed and served†with the other documents.
Gorry requested the hearing be continued to permit the required notice
and service of the opposition.
Genutec’s
counsel argued the sanctions motion must be denied based on counsel’s admission
it was untimely filed. He noted that
rather than withdrawing the motion after being alerted by opposing counsel it
was untimely, Gorry filed a reply brief.
Moreover, although alerted to the missing opposition, Gorry did not seek
a continuance before the hearing. Genutec’s
counsel reminded the court that both the Bryner Firm and the Shulman Firm had
requested attorney fees for opposing the motion, and that it was costly because
of the amount of sanctions being requested.
The
court denied the Taus/Hunter sanctions motion without prejudice. It continued the counter sanctions motion to August 5, 2011. The court stated the
parties could file additional briefing, and noted the fact one motion was
barred on procedural grounds potentially supplied grounds for additional
sanctions.
On July 14, 2011, Taus, Hunter, and the Eisner Firm refiled their
section 128.7 motion and scheduled the hearing for August 5, 2011. The motion was virtually
identical to their first motion.
The
following day, the Bryner Firm filed an ex parte application for an order
shortening the 21-day safe harbor provision for section 128.7 counter motions, and
specially setting a briefing schedule to permit the Bryner Firm to file a
counter motion. The Bryner Firm alleged
the second Taus/Hunter sanctions
motion inexplicably included the Bryner Firm despite all the briefing and
evidence presented showing the limited scope of the Bryner Firm’s
representation, and the lack of evidence the Bryner Firm was responsible for
prosecuting Genutec’s complaint. The
Bryner Firm explained an ex parte application was required because it could not
file its counter motion until it had received the refiled Taus/Hunter sanctions
motion.
The
Bryner Firm also filed evidentiary objections, and an opposition to the refiled
Taus/Hunter sanctions motion, supported again by declarations by Bryner, Lee,
and Nguyen. The Bryner Firm requested
the court take judicial notice of the documents filed in response to the first
round of section 128.7 motions. In
addition, it submitted the declaration of Michael Fell, who leased office space
in the same building as the Bryner Firm, and who found the second Taus/Hunter
sanctions motion wedged between the handles of the building’s front door at 5:50 p.m.
Taus,
Hunter, and the Eisner Firm opposed the ex parte application. Soon thereafter, they filed and served an
opposition to Genutec’s counter motion.
On July 25, 2011, Genutec and the Shulman Firm filed a new opposition the
Taus/Hunter sanctions motion and evidentiary objections to Gorry’s supporting
declaration. In support of the
opposition, they filed declarations from Outwater (attorney hired for 2006 fraud
action), Roy Cox (Genutec’s former chief operations officer), McCarthy
(computer forensic analyst), and Skaist (corporate counsel). A few days later, Genutec filed a reply in
support of its counter motion for sanctions.
It also filed evidentiary objections to Gorry’s declaration filed in
opposition to Genutec’s counter motion.
Four
days before the hearing, Taus, Hunter, and the Eisner Firm filed a reply brief
in support of its motion for sanctions. The
court denied the Bryner Firm’s
ex parte application to shorten time for filing its counter motion.
hearing on sanctions motions, Gorry discussed the evidence showing Taus and
Hunter were not liable for breach of fiduciary duty. Gorry repeatedly asserted the exonerating evidence
was not available until July 2010, when the trial court ordered Bryner to
produce documents “‘on the privilege log.’†Gorry argued Genutec has always been aware of
the exonerating evidence and yet it never dismissed Taus and Hunter from the
lawsuit, which warranted sanctions. He added
Bryner should be sanctioned for her role of being co-counsel and withholding
the privilege log.
Alternatively,
Gorry requested his clients be dismissed from the lawsuit or that the court strike
any allegations in the complaint alleging Taus and Hunter took no action to
investigate the shareholders’ concerns “because that is clearly not true.â€
Genutec’s
counsel, Pemberton, cited to evidence Taus and Hunter breached their fiduciary
duty to the company. Coming to Bryner’s
defense, Pemberton asserted that some of the purportedly missing documents were
produced in 2008, and some were available on Danna’s hard drive, which was made
available to the parties in
January 2010. Counsel stated
the forensic expert declared the information was available to the parties and
was not wrongfully withheld. Counsel
noted Taus and Hunter’s counsel did not bother to examine the hard drive.
Pemberton
maintained there was, at a minimum, a triable issue of fact with respect to
liability. He noted an expert would be
questioned at trial on the fiduciary duty issue. Moreover, much of the evidence was previously
raised by Taus and Hunter in support of their motion for summary judgment,
which the trial court denied.
Counsel
for the Bryner Firm, Nguyen, concurred with Pemberton and added there was no
evidence Bryner was ever authorized to dismiss Taus or Hunter from Genutec’s
complaint. Bryner was never retained to
represent “Genutec’s plaintiff capacity.â€
The
court asked counsel to clarify the amount of fees and sanctions each party was seeking. Counsel for the Shulman Firm (Pemberton),
stated his firm sought $23,575 to oppose the first Taus/Hunter sanctions motion
and an additional $14,400 to oppose the second motion. Counsel for the Bryner Firm (Nguyen) stated
it sought $95,300 to oppose the first motion, plus $4,620 in supplemental
briefing, and $7,945 to oppose the second motion. When Gorry attacked the large amount of requested
fees as being unreasonable, Nguyen noted Gorry had ample opportunity to
investigate and reply to the itemized billing submitted before the
hearing. Nguyen stated nothing was properly
raised in Gorry’s reply briefs or oppositions.
The court took the matter under submission.
128.7 Sanctions
One
week after the hearing, the Bryner Firm filed a counter motion for sanctions,
scheduling the hearing date for September 9, 2011. The grounds for the motion was the frivolous
nature of the second Taus/Hunter sanctions motion. However, the Bryner Firm withdrew the motion
after receiving the court’s ruling on August 22, 2011,
regarding the other motions.
the Taus/Hunter sanctions motion. It noted
this was their second motion for sanctions; the first motion was heard on June 17, 2011, and deemed defective for failing to comply with the safe harbor
provisions. The court stated, “Although the
documents presented in support of the motion do raise a question as to whether
or not Taus and Hunter are liable to . . . Genutec for breach of fiduciary
duty, they do not conclusively show Taus and Hunter are not liable . . . . That question is for determination by the
trier of fact. [Citation.] The [c]ourt finds this motion was brought for
an improper purpose and . . . opposing parties are entitled to an award of
reasonable attorney fees incurred in defending the motion(s). The attorney fees due Genutec have been
addressed in the separate motion of Genutec [for sanctions].†The court awarded the Bryner Firm $45,000 for
attorney fees and costs incurred to successfully oppose this motion.
The
court granted Genutec’s counter motion for sanctions, concluding the evidence
supported its claim the two Taus/Hunter sanctions motions “were made for an
improper purpose and that they had little if no merit.†It awarded $50,467.50, stating the award was
reduced because Gebhart should have billed at the reasonable hourly rate of
$175. Moreover, the fees included the
services of Bryner ($10,400), leaving $40,067.50 for the Shulman Firm.
II
APPLICABLE
LEGAL PRINCIPLES
“California courts
have inherent power to punish for contempt and to control proceedings before
the court . . . and to preclude evidence and dismiss actions in extreme
situations . . . . [¶] However, courts have no inherent power to impose monetary
sanctions against parties or their counsel.
[Citations.]†(Weil & Brown,
Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2013) ¶ 9:1001,
p. 9(III)-2; hereafter Weil & Brown.)
Consequently, there are several statutes and court rules giving courts
the power to impose both monetary and nonmonetary sanctions. Relevant to this appeal, section 128.7
permits sanctions for violation of the certificate of merit created by
attorneys or unrepresented parties presenting pleadings, motions, or similar
papers to the court.
Section
128.7, subdivision (a), provides, “Every pleading, petition, written notice of
motion, or other similar paper shall be signed by at least one attorney of
record
. . . or, if the party is not represented by an attorney, shall be
signed by the party.†The person signing
the paper “is certifying that to the best of the person’s knowledge,
information, and belief, formed after an inquiry reasonable under the
circumstances, all of the following conditions are met: [¶] (1)
It is not being presented primarily for an improper purpose, such as to harass
or to cause unnecessary delay or needless increase in the cost of litigation. [¶] (2)
The claims, defenses, and other legal contentions therein are warranted by
existing law or by a nonfrivolous argument for the extension, modification, or
reversal of existing law or the establishment of new law. [¶] (3)
The allegations and other factual contentions have evidentiary support or, if
specifically so identified, are likely to have evidentiary support after a
reasonable opportunity for further investigation or discovery. [¶] (4)
The denials of factual contentions are warranted on the evidence or, if
specifically so identified, are reasonably based on a lack of information or
belief.†(§ 128.7, subd. (b).)
To
summarize, the scope of certification relates to whether a pleading or similar
paper was filed (1) for a proper purpose, (2) has legal merit, and (3) has evidentiary
support. Violation of any of these
certifications may give rise to sanctions.
(Weil & Brown, supra, ¶
both law and fact, and thus to deter frivolous actions and costly meritless
maneuvers. [Citation]†(Id. at
¶ 9:1158, p. 9(III)-18; citing Business
Guides, Inc. v. Chromatic Communications Enterprises, Inc. (1991) 498 U.S.
533, 550 [interpreting Federal Rule 11])
The
purpose of section 128.7 is “to check abuses in the filing of pleadings,
petitions, written notices of motions or similar papers.†(Musaelian
v. Adams (2009)
45 Cal.4th 512, 514 (Musaelian).) “[S]anctions under section 128.7 are not
designed to be punitive in nature but rather to promote compliance with
statutory standards of conduct.†(
p. 14.) Accordingly, whether the
certificate is violated is tested objectively:
“The actual belief standard requires more than a hunch, a speculative
belief, or wishful thinking: it requires
a well-founded belief. We measure the
truthfinding inquiry’s reasonableness under an objective standard . . . .†(
21 Cal.4th 71, 82.)
To
effectuate this purpose, sanctionable conduct under section 128.7 is
petition, written notice of motion, or other similar paper’†to the court. It cannot be used to sanction out-of-court
misconduct, or misconduct occurring during trial. (Weil & Brown, supra, ¶ 9:1152, p. 9(III)-16.)
The
statute also authorizes a party to file a counter sanctions motion. “A motion for sanctions brought by a party or
a party’s attorney primarily for an improper purpose, such as to harass or to
cause unnecessary delay or needless increase in the cost of litigation, shall
itself be subject to a motion for sanctions.
It is the intent of the Legislature that courts shall vigorously use its
sanctions authority to deter that improper conduct or comparable conduct by
others similarly situated.†(§ 128.7,
subd. (h).)
A
section 128.7 sanctions motion is a two-step process. The moving party must first serve the motion
on the offending party without filing it, giving the opposition 21 days to
withdraw the improper pleadings and avoid sanctions. (§ 128.7, subd. (c)(1).) At the end of
the so-called “safe harbor†waiting period, the moving party may file the
motion and the court impose a sanction “limited to what is sufficient to deter
repetition of this conduct or comparable conduct by others similarly
situated. Subject to [certain
limitations], the sanction may consist of, or include, directives of a
nonmonetary nature, an order to pay a penalty into court, or, if imposed on
motion and warranted for effective deterrence, an order directing payment to
the movant of some or all of the reasonable attorney’s fees and other expenses
incurred as a direct result of the violation.â€
(§ 128.7, subd. (d).)
In
addition, the court “may award to the party prevailing on the motion the
reasonable expenses and attorney’s fees incurred in presenting or opposing the
motion. Absent exceptional circumstances, a law firm shall be held jointly
responsible for violations committed by its partners, associates, and
employees.†(§ 128.7, subd. (c)(1).)
“Sanctions
under [section] 128.7 are discretionary.
The court is not required to
impose a monetary sanction or any sanction at all. [Citations.]â€
(Weil & Brown, supra, ¶
9:1211, p. 9(III)-34; citing § 128.7, subd. (c); Kojababian v. Genuine Home Loans, Inc. (2009) 174 Cal.App.4th 408,
421.) Unlike other statutes permitting
sanctions, the focus of section 128.7 “is on deterring the offending party, not
compensating the offended party. Whereas
section 128.5 broadly authorizes the recovery of attorney’s fees incurred as a
result of an opponent’s bad faith misconduct,
section 128.7 directs judges to limit a fee award to ‘some or all’
of the fees ‘incurred as a direct result of the violation,’ and then only if
the award is ‘warranted for effective deterrence.’†(Trans-Action
Commercial Investors, Ltd. v. Firmaterr, Inc. (1997)
60 Cal.App.4th 352, 368.)
We note
section 127.8 provides a different standard for counter motions. As mentioned above, if a sanctions motion is
brought primarily for an improper purpose, it may itself be subject to a
counter motion for sanctions. (§ 128.7,
subd. (h).) In such cases, the
Legislature provided, “It is the intent of the Legislature that courts shall
vigorously use its sanctions authority to deter such improper conduct or
comparable conduct by others similarly situated.†(§ 128.7, subd. (h).) Sanctions appear to be required when a party
prevails on a counter motion. (See Weil
& Brown, supra,
¶ 9:1213, p. 9(III)-34.)
III
TAUS,
HUNTER & THE EISNER FIRM’S APPEAL
The
Eisner Firm filed an opening brief, which Taus and Hunter joined and adopted by
reference. (For convenience and clarity
these three appellants will be referred to collectively and in the singular as
the Eisner Firm, unless the context requires otherwise.) The Eisner Firm raises six arguments, three
of which relate to its theory the trial court was confused and misunderstood
the standards and purpose of a section 128.7 sanctions motion. The other three arguments relate to alleged
procedural errors. We find all the
arguments lack merit, and will begin by addressing the “court confusionâ€
arguments.
The
Eisner Firm briefed three separate arguments all essentially premised on the
same theory that the court was confused or misunderstood the nature of the
hearing and the correct standards to apply. The arguments sound very similar to one
another, but have subtle differences.
The first argument alleges the court misunderstood the standards used
for section 128.7 sanctions motions because it often “shifted focus†to the
standards used for discovery motions.
The second argument focuses on evidence of the court’s purported “disjointed
questioning,†and asserts that because the court asked questions about
discovery motions and summary judgment motions, it clearly misconstrued the
purpose of the hearing. The third
argument maintains the court improperly construed the sanctions motion to be a
discovery related motion, and consequently applied the wrong standards and
rules. As we will explain, the record
does not support these contentions.
We
begin our analysis by noting the well settled rule, “A ruling by a trial court
is presumed correct, and ambiguities are resolved in favor of affirmance. [Citations.]â€
(Winograd v. American Broadcasting
Co. (1998) 68 Cal.App.4th 624, 631 (Winograd);
see e.g., In re Marriage of Arceneaux
(1990) 51 Cal.3d 1130, 1133 [judgment or order presumed correct on appeal “and
all intendments and presumptions are indulged in favor of its correctnessâ€].) “The burden of demonstrating error rests on
the appellants. [Citation.]†(Winograd,
supra, 68 Cal.App.4th at p. 632.)
The
Eisner Firm’s first argument asserts the court “displayed a basic
misunderstanding of the standards and purposes of the [section] 128.7 motion
and the counter motion.†(Original
capitalization omitted.) The Eisner Firm
begins the argument by boldly asserting, “An examination of the [r]eporter’s
[t]ranscript shows that the lower court consistently shifted focus between the
standards used for determining discovery motions and the objective standard
required for a motion brought under . . . [section] 128.7.â€
Noticeably
absent from this argument are any actual citations to the reporter’s transcript
to demonstrate the court improperly applied the standards used for discovery
motions. Moreover, in making this
argument, the Eisner Firm cites to one case, Abbett Electric Corp. v. Sullwold (1987) 193 Cal.App.3d 708, which addressed
a sanction order made under section 128.5, a different statutory provision not utilized
in this case.
In
light of the lack of record references and applicable case authority, we deem
the argument waived. “‘It is the duty of
a party to support the arguments in its briefs by appropriate reference to the
record, which includes providing exact page citations.’ [Citations.]
If a party fails to support an argument with the necessary citations to
the record, that portion of the brief may be stricken and the argument deemed
to have been waived. [Citation.]†(Duarte
v. Chino Community Hospital (1999) 72 Cal.App.4th 849, 856.)
The Eisner
Firm’s second argument, asserts evidence of “disjointed questioning†proves the
court did not apply the correct procedural and legal standard for the sanctions
motions. It contends the court’s
questions demonstrate it “misconstrued the purpose†of a sanctions motion. To support this theory, the Eisner Firm
provided a few record citations but no case authority or legal analysis. As we will explain, when the court’s
statements and questions are viewed in context we find nothing suggesting the
court was too confused about the legal proceedings and failed to apply the
correct standard.
The
Eisner Firm begins its argument by citing pages 21 through 23 of the reporter’s
transcript as supporting its observation the court “appeared to be confused by
the correct standard to apply, and seemingly thought that bringing the [section]
128.7 [m]otion on a stand-alone basis was improper.†However, we discovered these pages of the
reporter’s transcript actually do not contain any statements or questions made by
the court. It is comprised entirely of
argument presented by Gorry. The Eisner
Firm offers no reasoned analysis to support its theory the argument of counsel may be attributed to the court without any
other direct evidence of the court’s acquiescence to the argument. In other words, just because counsel believes
the court is mistaken or confused does not make it so.
Gorry’s
discussion on those pages of the record related entirely to his belief the
court made a mistake with respect to its tentative decision prepared for the
second hearing. (A copy of the tentative
ruling was not included in our record.) Gorry
asserted the tentative decision incorrectly noted the counter motion was granted
at the first hearing. After considering
argument from opposing counsel on the issue, the court stated on page 27 of the
reporter’s transcript that the parties could proceed and begin with argument on
the Taus/Hunter sanctions motion. It
made no express ruling with respect to the alleged mistake. And even if we were to assume, simply for the
sake of argument, the court did make a mistake on the tentative decision, the
mistake would not prove the court also misunderstood the applicable standards
for determining the Taus/Hunter sanctions motion. We found nothing in the transcript suggesting
the court misunderstood a
section 128.7 motion must be made separately, or on a “stand-alone
basis.†The court’s final order provides
strong evidence to the contrary. The
court’s order reflects it considered and ruled on the Taus/Hunter sanctions
motion separately from the counter
motion. As noted previously, the trial court’s ruling
is presumed correct, and all ambiguities are resolved in favor of its
correctness. (Winograd, supra, 68 Cal.App.4th
at p. 632.)
Citing
to pages 59 through 62, and pages 66 and 67 of the reporter’s transcript, the
Eisner Firm paints a very grim picture of a trial court so utterly confused
about the nature of the proceedings that it could not remember if it was
deciding a discovery motion, a motion for summary judgment, or a sanctions
motion. In particular the Eisner Firm is
highly critical of the court’s statements and questions regarding whether there
was evidence of discovery abuse or whether Taus and Hunter could have discovered
the exonerating evidence sooner.
For
example, the Eisner Firm maintains, “[The court] repeatedly kept focusing on
the ‘red herring’ arguments advanced by [Genutec’s] counsel that the [section]
128.7 [m]otion was, in fact, [an improper] discovery motion.†It speculates the trial court “got swept up by
the . . . ‘discovery’ argument, and repeatedly focused on the red-herring
argument that Taus and Hunter ‘always’ had access to the documents that formed
the basis for [their m]otion.†The
Eisner Firm criticizes the trial court for engaging in “a classic case of ‘missing
the forest for the trees†by asking the question about Taus’s and Hunter’s
access to hard drives and other sources for discovery of the exonerating
evidence. It asserts the timing of the
production was “of no import†for purposes of the sanctions motion.
Unlike
its prior arguments, this particular contention is supported by several record
references in which the court asked questions about the discovery process to
uncover the alleged exonerating evidence.
However, we disagree with the Eisner Firm’s conclusion the court’s
inquiry into discovery matters suggests it was confused about the nature of the
sanctions motion.
The
statements and questions must be read in context of the entire hearing, which
we will briefly summarize as follows:
After argument about whether the court’s tentative was incorrect (which
was unresolved), the court directed the parties (on page 34 of the reporter’s
transcript) to present their arguments on “the Taus/Hunter motion for
sanctions.†The next 12 pages of
transcript contain Gorry’s arguments regarding the sanctions motion. He brought up a number of points, including a
lengthy recitation of the allegations in the complaint. He discussed evidence and argued the facts exonerated
Taus and Hunter from liability. Additionally,
Gorry was given an opportunity to discuss each exhibit supporting the sanctions
motion. He repeatedly asserted the
exonerating evidence was wrongfully withheld by Genutec, and he spent a great
deal of time criticizing all of Genutec’s attorneys for failing to provide the
documents earlier and not dismissing his clients from the case. Gorry also reminded the court that “as we pointed
out in our motion for summary judgment†there was a presumption in favor of the
directors.
Beginning
at page 46 of the transcript, the court permitted Genutec to present its
arguments. Pemberton argued the evidence
at best created a triable issue of fact regarding whether Taus and Hunter
breached their fiduciary duty. Pemberton
also refuted Gorry’s accusations of discovery misconduct and noted the
exonerating documents could have been found on a different computer.
After
Pemberton concluded his argument, the court asked Gorry questions (on pages 57
to 59) about whether there was a difference between Genutec’s first and third
causes of action. Next, the court asked a
series of questions relating to Pemberton’s assertion the purported exonerating
evidence was not wrongfully withheld, asking questions about Hunter’s computer
and why she threw it away.
The
exchange which followed (pages 59 through 62, and pages 66 through 67),
represents the portion of the transcript the Eisner Firm finds most
disturbing. It asserts these pages show
the court was completely befuddled and unreasonably got “swept away†by
irrelevant discovery issues. We
disagree.
During
this part of the hearing, the parties were engaged in a spirited dispute about
whether the evidence was available to Taus and Hunter at an earlier time. The Bryner Firm and the Shulman Firm
vehemently disputed Gorry’s repetitive and offensive accusations of discovery
misconduct. Pemberton explained the documents
were initially withheld because the United States District Court for the
Northern District of Illinois had issued a preliminary injunction regarding the
disclosure of any documents concerning Smit.
Bryner did not want to get in trouble with the district court, and
therefore requested a court order to produce the documents. Pemberton added there was never a motion to
compel and the documents were turned over through a “meet and confer process.†Not surprisingly, Gorry disputed this version
of events, sticking to his argument he won the discovery dispute.
Although
this discussion was somewhat tangential to the basis for the sanctions motion,
the court’s questions and statements about the “discovery argument†is certainly
understandable when viewed in the context of what was being discussed at the
time. The court reasonably wished to
understand if Gorry was being truthful in his representation the evidence was
wrongfully withheld. The argument is
related and relevant to the primary issue of whether Genutec purposefully kept
Taus and Hunter in the litigation knowing they were not liable. We found nothing in the discussion from which
it could be inferred the court got swept away by discovery issues and forgot it
was considering a sanctions motion. This
record simply does not support the contention that the court misunderstood the
difference between discovery and sanctions motions.
In
addition, it cannot be overlooked that earlier in the hearing Gorry disclosed Bryner’s
purported discovery violations were the primary
basis for the sanctions motion against her firm. Gorry explained Genutec must have known about
the exonerating evidence because Bryner possessed it. Gorry argued, “Bryner was the one who was in
possession of these documents, that is why . . . Bryner is here.
[Section] 128.7 is not just the person who signs the complaint, but
anyone who acts [in] concert. Bryner was
one of the outside counsel for Genutec. . . .
[¶] . . . The only improper
purpose here, your honor, was withholding of these documents. It was not . . . looking at these documents
prior to filing the complaint.†For this
additional reason, we conclude the court’s questions regarding discovery issues
was appropriate and relevant to the issues raised by Taus and Hunter’s counsel.
Moreover,
a sanctions motion should be served promptly after the purported violation is
discovered. “Although there is no time
limit on a party’s motion for sanctions, the court may consider whether the
moving party exercised ‘due diligence.’
[Citation.]†(See Weil &
Brown, supra, ¶ 9:1187, p. 9(III)-26;
§ 128.7, subd. (c) [“In determining what sanctions, if any, should be ordered,
the court shall consider whether a party seeking sanctions has exercised due
diligenceâ€].) As applied to this case,
if Taus and Hunter could have discovered the exonerating evidence earlier (on
their own computers) due diligence would be an issue. Whether the motion was unreasonably delayed
was an appropriate factor for the court to consider and question the parties
about.
And
finally, it should not be overlooked that Genutec’s opposition asserted the Taus/Hunter
sanctions motion was actually a poorly disguised and belated discovery motion seeking
sanctions. The Eisner Firm concedes the
argument was raised in the briefing but argues it lacked merit because Taus and
Hunter had already prevailed in the discovery dispute. That may be true, but nevertheless, we will not
construe the court’s consideration of an issue raised in the opposition as a
sign it was confused.
As
further evidence of “disjointed questioning†the Eisner Firm points to the part
of the reporter’s transcript where the court briefly focused on Bryner’s role
in representing Genutec, and then changed focus and asked “‘aren’t you trying
to do another shot at a motion for summary judgment.’†(Original capitalization omitted.) The Eisner Firm asserts that when counsel
tried to explain the nature of its motion, “the court again defaulted to the
discovery arguments advanced earlier.â€
Based on this seemingly odd and disjointed sequence of events, the
Eisner Firm concluded, “Once again, it was readily apparent that the lower
court did not understand the nature or purpose†of the sanctions motion. The contention is belied by the record.
First,
one need only look at the record references supplied by
the Eisner Firm–they are not in sequential order. The court’s discussion about
Bryner’s representation was contained on pages 84 and 85 of the
reporter’s transcript, and the court’s one question about Taus and Hunter
getting a second shot at a summary judgment motion occurred much earlier in the
proceedings at page 62 of the reporter’s transcript. The Eisner Firm broadly referred to pages 59
to 62, and pages 66 to 67, as relating to the “‘discovery’†arguments, but
nevertheless these exchanges occurring long before the court’s remarks about
Bryner’s representation of Genutec on pages 84 and 85.
Second,
it is important to understand the context in which the court made the allegedly
disjointed and random statements about (1) Bryner, (2) a second summary
judgment motion, and (3) discovery arguments.
At pages 84 and 85, the court asked Bryner’s counsel to articulate the
amount of fees the Bryner Firm would request if deemed the prevailing party on
the sanctions motion. Bryner’s counsel
stated her fees were higher than the Shulman Firm’s fees. She explained Bryner’s opposition involved
additional investigation and research about whether Bryner ever represented
Genutec in its plaintiff capacity. The court
commented Bryner was listed on the face of the complaint, but then it immediately
returned to the issue at hand, i.e., the amount of fees being requested. A discussion about the amount of fees continued
until page 87 of the transcript. We
found nothing in this exchange to suggest the court was confused or unaware of
the purpose of the sanctions motion. To
the contrary, attorney fees may be awarded as section 128.7 sanctions to the
prevailing party who successfully opposed a sanctions motion. (Weil & Brown, supra, ¶¶ 9:1220 & 9:1222, p. 9(III)-34.2; citing § 128.7,
subds. (c) & (d).)
Contrary
to the Eisner Firm’s argument, during the discussion about the amount of fees
recoverable the court did not abruptly shift its focus “to another completely unrelated
type of motion, namely a motion for summary judgment.†As we will now explain, the court’s question
about whether the sanctions motion was really a belated summary judgment motion
occurred much earlier in the hearing and was reasonably related to the issues
being discussed at that time.
Indeed,
we find disingenuous the Eisner Firm’s suggestion the court failed to focus on
the sanctions motion and instead asked random questions about summary judgment
motions and discovery motions throughout the hearing. Beginning at page 34 and ending at page 57,
the court focused entirely on arguments from both sides about the merits of the
sanctions motion. Starting at page 57 of
the transcript, the parties and the court spent some time exploring the basis
for Gorry’s contention exonerating evidence was wrongfully withheld. Gorry repeatedly stated the evidence proved Taus
and Hunter were not liable. It was in
this context that the court asked Gorry, “Aren’t you trying to do another shot
at a motion for summary judgment?†Gorry
replied he was not but “the effect ultimately is the same.†He added there was insufficient time to file
a second motion for summary judgment before the trial date. The court then asked counsel if there was any
further argument. Both sides presented
additional argument on the merits of the Taus/Hunter sanctions motion.
Thus,
when considered in context, the summary judgment question did not come out of
left field. Gorry raised an argument
generally reserved for summary judgment motions, i.e., there was no triable
issue of fact regarding Taus and Hunter’s liability. He did not appear surprised by the court’s observation
it appeared his clients were seeking a second shot at summary judgment. To the contrary, Gorry admitted the relief he
was seeking though the sanctions motion was “effectively the same†and he
indicated that if there had been more time before trial, he could have filed a
second motion for summary judgment. We
have no reason to suspect the court’s question signaled it was confused about
the purpose of a section 128.7 motion or the appropriate standards to apply. We conclude the court’s question suggests it
understood exactly the basis for the sanctions motion, i.e., the complaint was
filed for an improper purpose because it lacked evidentiary support.
The
third and final “confused court†argument is based on the theory the court
improperly accepted the argument Taus and Hunter filed a discovery-related
motion. The Eisner Firm provided this
court with ample case authority explaining different standards apply for
discovery sanctions versus section 128.7 sanction motions. The Eisner Firm concludes the court imposed
sanctions applying the standards used in discovery motions. It adds, the court “appeared unaware†section
128.7 sanction motions do not apply to “disclosures and discovery requests,
responses, objections or motions.â€
As with
the Eisner Firm’s prior arguments, we find no support in the reporter’s
transcript for this contention. The
court did not say anything that could be construed as evidence it believed it
was deciding a discovery motion. The Eisner
Firm provides one citation to the clerk’s transcript, focusing on a fragment of
one sentence contained in the court’s final order. Based on this fragment, it argues the record
shows the court “accepted [Genutec and the Bryner Firm’s] argument that [the
Taus/Hunter sanctions motion] was actually a discovery motion, and in fact
signed a proposed order which stated that ‘Genutec’s and the Bryner Firm’s
alleged discovery misconduct is not a basis for a motion under [s]ection
128.7.†(Original underline.) In other words, the Eisner Firm construes the
court’s ruling as evidence the court believed it was deciding a discovery
motion rather than a sanctions motion.
Nonsense!
Apparently,
the Eisner Firm was under the mistaken impression this court would not take the
time to read the entire final order (prepared by counsel). The order begins by recognizing Taus and
Hunter filed two identical sanctions motions.
The court concluded, “[both m]otions were made for an improper purpose,
such as to harass or to cause unnecessary delay or needlessly increase the cost
of litigation or to force Genutec and [the Shulman Firm] to dismiss Genutec’s
claims against [Taus and Hunter] under threat of sanctions in excess of [$1
million]. [Citation.] Specifically the Eisner Firm filed [the
Taus/Hunt
| Description | This appeal concerns two motions for sanctions made under Code of Civil Procedure section 128.7.[1] The underlying lawsuit concerns Genutec Business Solutions’ (Genutec’s) breach of fiduciary duty claims against its former attorneys, accountants, and board of directors, including Michael Taus and Lawnae Hunter. Believing there was no basis for a lawsuit against them, Taus and Hunter filed a section 128.7 motion for sanctions (hereafter referred to in this opinion as the Taus/Hunter sanctions motion). They sought $1,098,046.03 against Genutec and its counsel, namely, (1) the Law Offices of Candice Bryner (the Bryner Firm), and (2) Shulman, Hodges & Bastian (the Shulman Firm). In response, Genutec filed a counter motion for sanctions permitted by section 128.7, subdivision (h), on the grounds the Taus/Hunter sanctions motion was filed primarily for an improper purpose (hereafter the counter motion). The counter motion sought $51,990 against Taus, Hunter, and their counsel, Eisner, Kahan & Gorry (the Eisner Firm).[2] The court denied the Taus/Hunter motion for sanctions. It awarded the Bryner Firm $45,000 for attorney fees and costs incurred to successfully oppose this motion. The court granted the counter motion, awarding Genutec sanctions of $50,467.50. On appeal, Taus, Hunter, and the Eisner Firm make the following arguments: (1) the court should have granted their motion for sanctions; and (2) it was an abuse of discretion to award sanctions to the Lee Firm, the Bryner Firm, and the Shulman Firm because they were all self-represented litigants. Genutec filed a cross-appeal, arguing the trial court erred in denying its request for attorney fees incurred in defending the Taus/Hunter sanctions motion. Finding no error, we affirm the trial court’s orders. |
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